2006 (3) TMI 208 - AT - Income Tax

Tribunal's Ruling on Loan Granting & Capital Assessment

The Tribunal clarified that hire purchase and bill discounting are not considered part of granting loans and advances within the scope of s. 73, Expln. ... Mistake Apparent Issues:Rectification in the impugned order regarding the business of hire purchase and bill discounting as part of granting loans and advances within the scope of s. 73, Expln. (ii) and calculation mistake in determining the percentage of funds employed in the business of granting loans and advances.Analysis:1. The first issue raised in the application was regarding whether the business of hire purchase and bill discounting can be considered part of granting loans and advances within the scope of s. 73, Expln. (ii). The Tribunal clarified that only the activity of granting loans and advances should be considered, excluding other financing activities. It was pointed out that bill discounting cannot be equated with granting loans and advances. The Tribunal also referenced a Supreme Court case stating that hire purchase does not amount to granting of loans and advances. Therefore, the Tribunal found no mistake in its order regarding this aspect of the submission.2. The second issue involved a calculation error in determining the percentage of funds employed in the activity of granting loans and advances. The Tribunal acknowledged this mistake and corrected the calculation. It was noted that the percentage was actually more than 50%, contrary to the initial calculation indicating less than 50%. The Tribunal modified the relevant paragraphs in the order to reflect the correct figures. The Tribunal emphasized the importance of accurately assessing the capital employed in the business of granting loans and advances for proper adjudication.3. Further analysis delved into whether the principal business of the assessee was indeed that of granting loans and advances. Reference was made to a Special Bench decision highlighting the need to consider various factors, including the memorandum of association, capital employed, and income derived from the activity of granting loans and advances. The Tribunal found that sufficient material was not available to conclusively determine the principal business of the assessee. Consequently, the matter was remitted to the Assessing Officer for fresh adjudication to ascertain whether the principal business was indeed granting loans and advances in accordance with the provisions of the Explanation to s. 73 of the Act.4. In conclusion, the Tribunal partially allowed the miscellaneous application, rectifying the calculation mistake while emphasizing the importance of a thorough examination of the capital employed in the business of granting loans and advances. The matter was remitted to the Assessing Officer for further evaluation to determine the principal business activity of the assessee.